The recent case of CED Limited v HMRC1 illustrates the importance of preparing thoroughly for the hearing of a tax appeal – even an apparently straightforward penalty appeal – before the First-tier Tribunal (FTT).
Point in issue
The question for determination was whether HMRC had properly charged CED Limited (CED) with penalties at 3% (amounting to £22,735) on the ground that CED had failed to make PAYE payments on time and had no reasonable excuse for making late payment.
Oral evidence was given on behalf of CED by Mr Richard Davis, its financial director and company secretary, who had for 20 years been responsible for making CED’s tax payments. He said CED had always paid PAYE by cheque, with each payment sent by first class post to HMRC. He was aware that the payment deadline for employers was the 19th of each month. Early in each month he received a note setting out CED’s PAYE liability for that month. A week or so before the due date he drew the required cheque, which he kept on his desk. The cheque would be placed in an envelope addressed to CED’s tax office on the 18th of each month if the 19th was a weekday and two or three days earlier if the 19th fell on a weekend or a bank holiday. The Royal Mail made a daily collection of outgoing post from CED’s premises. Those dates were ‘engraved on [his] mind’. Exceptionally, usually in December/January when CED had cash flow problems, other payment arrangements would be made. Nothing had happened to cause him to doubt that each cheque would be delivered to the tax office the next day. CED’s quarterly VAT payments were posted the day before the due date and had always reached the relevant tax office on time.
At the appeal hearing, HMRC produced 11 photocopied pages headed ‘ARP Serial Number’. These each set out a ‘Processing Date’ which, in 10 out of 11 cases, was between two and five days after the 19th. Each page contained a photocopy of the relevant cheque. HMRC argued that CED’s cheques must have been posted late, otherwise they would not have been recorded as having late Processing Dates. ‘Processing Date’ should be read as being equivalent to ‘Date of Receipt’ as HMRC’s normal procedure was to present cheques on the date of receipt. HMRC also adduced an internal record of computer generated letters showing that HMRC had sent CED a warning letter stating that CED had made one late payment and might incur a penalty if it continued to do so. Mr Davies said he was unaware of having received this letter.
Paragraph 14, Schedule 56, Finance Act 2009, gives a taxpayer the right to appeal against a decision by HMRC made under paragraph 1 that a penalty is payable due to a late payment of tax. Paragraph 15 provides that on such an appeal the tribunal may affirm or cancel HMRC’s decision. HMRC bears the burden of proving such penalties are payable.2 Paragraph 16 provides that there is no liability to a penalty if the taxpayer satisfies the tribunal that there is a reasonable excuse for the failure to pay on time.
The FTT’s decision
In allowing the appeal, the FTT stated that a person can reasonably expect that a letter posted first class on Day 1 will reach its destination on Day 2. Unless something exceptional had happened, the Royal Mail’s published aim to deliver 93% of first class mail the following day meant CED would have had a reasonable excuse for late payment if delivery had been later.
That, according to the FTT, was not the point here. HMRC contended that the letters containing CED’s cheques must have been posted late, otherwise they would not have been recorded by HMRC as having ‘Processing Dates’ falling between two and five days after the due date.
The FTT rejected HMRC’s invitation that it read ‘Processing Date’ as meaning ‘Date of Receipt’. This assertion was unsupported by evidence of practices in tax offices. That left Mr Davies’ evidence, which was accepted. The FTT was impressed by the fact that he had a system, CED’s VAT compliance was beyond reproach and there was no suggestion that CED’s cash flow position was a consistent problem. The FTT also accepted that the warning letter, if received by CED, had not been passed to Mr Davies. HMRC had failed to discharge the burden of satisfying the FTT that CED had failed to pay on time.
The FTT decided that, to the extent that CED had to rely on a reasonable excuse for late payment, it was entitled to do so.
Although a decision of the FTT is not a binding precedent, this case provides useful guidance to taxpayers on how to prepare for the hearing of a penalty appeal and what the FTT’s approach is likely to be.
HMRC’s process-driven presentation of its case was inadequate given that it bore the burden of proof on the main question and had to displace CED’s detailed evidence which was to the contrary. HMRC gives the impression of having approached this as a typical penalty appeal that warranted no more than its standard presentation. CED could not adopt such an approach as, although the amount involved was comparatively small, it represented a significant liability to a company of its size.
If a taxpayer’s compliance record and cash flow history are good and it can demonstrate that tax payments were sent by first class post at least one working day before the payment due date, it will have a good chance of succeeding in its appeal. HMRC would have to adduce evidence showing that payments were not received on time – not an easy task given the large number of payments it receives.
Even if payments are received after the due date, a taxpayer may be able to rely on the Royal Mail’s 93% delivery target for first class post in contending there was a reasonable excuse for late payment. Such an argument is likely to be strongly resisted by HMRC, whose preference is for payments to be made electronically, failing which, if a cheque is sent by post, taxpayers are advised that they should ‘allow at least three working days for the payment to reach HMRC to allow for any delays in the post which are outside HMRC’s control’.3
For the full decision click here.